2024 looks to be a good time to invest in short-term rental properties. Occupancy rates are stabilizing and rental rates are increasing, leading to better returns for businesses.*
However, there’s a ticking clock — you have to jump on opportunities while the market is still hot and before other investors have moved in.
You need to do a thorough analysis to see whether a property will be profitable but there are lots of moving parts to consider. By the time you’ve done your research and consulted with experts, your chance may have passed.
Understanding the key factors behind what makes a short-term property profitable can help you make fast and sound decisions. We chatted to revenue management expert, John An of Tech Tape, to get his insights.
*U.S. 2024 and 2025 Mid-Year Outlook Report, AirDNA
Is it worth investing in vacation rental properties?
There’s plenty of evidence to suggest that vacation rentals are a sound, long-term investment. AirDNA data shows they make 67% more on average than long-term rentals.
Aside from turning a healthy profit, the property should appreciate over time. House prices are still increasing at a rate of around 6% year-on-year.
All investments come with risks attached but you can minimize them by doing market research and analyzing each property.
However, it’s important to note that calculating your rental income isn’t an exact science. There are several factors at play including local occupancy levels, nightly rates, and booking numbers. You can estimate your Airbnb income but you can never be 100%.
Sudden market shifts add an extra element of unpredictability. You never know when travel trends or changing regulations might impact your business.
John An says that’s why you shouldn’t just rely on the data. “Sometimes people just look at the numbers and what gives them the highest return. Using this unfiltered approach without considering any other factors is when you’re most likely to make a mistake.”
With that in mind, here are the factors you should consider when looking at potential Airbnb properties.
How to analyze a vacation rental property in 9 steps
When looking at investment opportunities, consider the following factors in the order given. You can rule out bad prospects as early as possible in the process and save yourself time.
1. Define your goals
Before anything else, decide what you actually want from the property. Profits are important but they might not be your key focus. “You might think investments are all about making as much money as possible,” says An, “But there’s a lot more nuance to it than that.”
One example he gives is cash-on-cash return. “You may wish to prioritize getting your initial investment back over maximizing your profit margins so the property’s cash flow returns quickly. A property that costs less to acquire and set up but may have limited appreciation potential might be the right option.”
Another example he gave was appreciation. “In some places, it might be harder to see a return on investment but you can guarantee the property value will significantly increase. If your goal is to purchase a property to hold with the total return in mind, then achieving a cash-on-cash return will be slightly less important.”
Perhaps your main motivation isn’t even financial. Many people buy holiday homes for their families to enjoy and rent out the property when they’re not using it. You’re more likely to be satisfied with something that suits your interests than an investment that generates a high cash flow.
So when calculating profitability, you need to balance that against other concerns. An says you should start by asking yourself, “What am I looking for as an investment? What’s my definition of a return? How fast do I need that return?”
2. Understand local regulations
The next step is to look at whether you’ll be able to set up an Airbnb business in the location. Tough short-term rental regulations can completely rule places out of contention. You may find you’re unable to accept guests for large chunks of the year or the high taxes cut into your profits.
Equally, be wary of places with no restrictions on vacation rentals whatsoever. They’re the most likely to crack down hard as the unregulated growth causes issues in the local community. Some US cities have been known to have open short-term rental markets for years before suddenly introducing strict new laws.
An says his strategy is to find places that have already been regulating STR rentals for years. “Regulations are one of the biggest variables,” he says, “Policies can shift very quickly. But if laws have been in place for a while, that’s a sign that they’re working and the situation isn’t likely to change soon.”
3. Scope out the location
If the local laws are accommodating to Airbnb rentals, see whether the economic conditions make the area a good option. Look at the following factors:
- Tourism levels
- Seasonal fluctuations in demand
- Property prices
- Availability of nearby amenities
- Nearby attractions and activities
- Accessibility and transport
- Local crime rates
Also, consider the economic outlook for locations. While there are no guarantees, steady tourism levels and increasing property values indicate the area is a safe investment.
A recent AirDNA report discussed one strategy to predict future demand. Look at feeder cities a.k.a the places where visitors to a location normally come from. Is their local economy thriving? That’s a sign they’ll have enough disposable income to keep visiting your destination and spending money on your business.
4. Research your competitors
Looking at vacation rentals in an area can reveal whether your business is likely to be a success. You can check if there’s a strong demand for your property type and how much revenue you’re likely to generate.
Browse the local VRBO and Airbnb listings for the area to see what’s on offer. Property management expert Matthew Consolo says, “If there’s not much demand for your property type, then it’s a non-starter. Take a close look at similar properties and if they’re unoccupied or charge low rates, it’s a clear indicator to walk away.”
Use pricing tools like PriceLabs and Beyond to conduct deeper market analysis and access competitor data. You can get insights into the occupancy rates, booking numbers, and average daily rates for certain areas. The software can even hone in on specific neighborhoods or addresses you’re considering.
Pricing tools let you conduct competitor analysis and access essential metrics like occupancy rates and revenue per available room. Source: beyond.com
Look at bookings and occupancy over the entire year. You can factor in slow periods and the low season to create more realistic revenue projections.
5. Estimate your setup costs
Nearby businesses may reveal that there’s a demand for the location and type of accommodation. However, if the property you’re considering requires a large upfront payment and extensive work, it may still not be worth the investment.
Estimate how much you need to acquire the property and get it ready for guests. You can look at:
- The down payment
- Closing costs i.e. transfer taxes and legal fees
- Renovations and repairs
- Furnishings and appliances
- Decor and amenities
- Initial supplies
- Security features
Balance these setup costs against the typical income for the area. You can see how long it’ll take you to pay off these initial expenses and start seeing a return on your rental investment.
Say you spend $150,000 on setup and expect to generate $30,000 per month. You know it will take over five years to see a return on your investment — and that’s before you’ve factored in the ongoing expenses.
As mentioned, the ideal break-even point depends on your personal goals. You may not mind a longer wait if you want to use the property as your own holiday home. However, if it takes longer than average for the area to recoup your losses, it’s a sign the property is a poor investment.
6. Consider your ongoing expenses
Running a successful STR business depends on the quality of your supplies and services. That means you may rack up a lot of monthly and annual expenses.
The costs are extremely variable as they depend on your location and property type. One common example is that some neighborhoods have fees for community areas whereas others don’t. However, most hosts can expect to pay the following expenses:
- Rent or mortgage payments
- Booking fees
- Utility bills
- Maintenance and repairs
- Cleaning fees
- Supplies like soap and towels
- Payroll and benefits for staff
Calculate how much you need to spend each month to meet your desired standards. Then you can explore various cost-saving initiatives to lower that amount. For instance, many hosts compare wholesalers to get the best prices on stock and supplies.
You only need to decide an optimal range as you’re not locked into these costs. Once you’re up and running, you can make adjustments based on your data. Leading PMS like Hostfully include financial reports so you can easily track your business expenses.
8. Look at taxes and liabilities
Both owning real estate and running a business come with various obligations and fees. You need to account for these in your analysis as they’ll be a significant expense.
Fees vary between locations but usually involve:
- Property tax
- Business income tax
- Short-term rental tax
- Homeowners’ insurance
- Liability insurance
- Permits and renewals
- Annual quality checks
Understanding your taxes and liabilities can be challenging. Some places base fees on a variety of factors like zoning laws, property type, and occupancy levels. It may be worth contacting your local council to get a breakdown of all the costs you’ll owe.
9. Decide whether to outsource
Consider whether it’s more cost-effective to manage the business yourself or use a property management service.
The main consideration is your level of skill and experience. If you’ve already worked in hospitality or property rental management, you may know the best strategies to make money. Newcomers to the industry may require expert assistance to make the right business decisions.
Although outsourcing involves paying a monthly fee, great services end up can increase your profits. They can use their expertise to cut costs or maximize your rental income.
Another consideration is your time and availability. If your short-term rental is just a side venture, consider how the demands of the business may impact your main job.
Research all the property management companies in your area to get a clearer picture of the potential costs or savings. As well as getting prices, you can look at successful case studies to see how much money you could save. Weigh up the potential gains against the monthly expenses to confirm using the service is worthwhile.
Determining your profitability
The final step is to add all your projected income and your expected expenses. Then subtract the expenses from the income to get your net profit.
Keep in mind your reasons for investing in the property in the first place. If the profit is higher than you expected, check it’s not at the expense of your personal goals. Is the cash-on-cash return still high enough? Are you going to be able to stay at the property whenever you’d like to?
If you’re unsatisfied with the total profit, there’s no need to start immediately looking elsewhere. Consider where you can save money on setting up and running the business. Often, just a few changes can help you reduce your costs.
Read our guide on the best ways to cut vacation rental costs and increase your profitability to learn more.
What do good profits for a vacation rental look like?
The ideal profit margins for a short-term rental property are somewhere between 20% and 50%. They should never drop lower than 10%.
Low profits indicate your real estate investment isn’t making sufficient gains to justify the effort and risk. If your motivations are purely financial, there are safer ways to see the same return on your money.
As John An points out, the main appeal of investing in vacation rentals is the potential for phenomenal returns. “There are more passive ways of getting a 10% return. Short-term rentals are better than a lot of other assets but they require a lot of work.”
He says if you look, there are many opportunities to make closer to 50%. The key is both getting the right property in the right market and operating the business correctly. From his time as an investor and revenue manager, he knows this is possible because he’s seen these numbers coming in.
Boost your profitability with Hostfully
Running a profitable short-term rental business is about more than making a sound investment. You have to deal with revenue management and ongoing maintenance whether or not you’re hands-on.
Making sure you have the right tools at your disposal can help you cut costs and raise your earning potential.
All-in-one platforms like Hostfully automate booking processes and communication, saving you time and labor costs. You can use the same tools to streamline the guest experience so you get more positive reviews and repeat bookings.
Hostfully also helps you make strong financial decisions for your business. Our reporting and analytics features give you deep insights into your performance so you can quickly identify cost-saving opportunities. Whether you’re deciding the best pricing strategy or negotiating with suppliers, you can be sure to turn a profit.
